Bitcoin ETFs on the Horizon -- Barrons.com

23 Sep 2017 4:28 am

By Crystal Kim

Bitcoin, the cryptocurrency polarizing governments, banks, and investors alike, has plummeted more than 25%, to around $3,580, from its early September peak of $4,950.72, according CoinDesk. The sell-off was largely driven by Chinese regulators formally shutting major Bitcoin exchanges.

It didn't help that JPMorgan Chase CEO Jamie Dimon called Bitcoin a "fraud" and "worthless" and that Bridgewater's Ray Dalio called it "a bubble" in the days following China's crackdown. Fundstrat Global Advisors' Thomas Lee disagrees, saying that China's recent moves are a short-term head wind, given that the region represents just 20% to 25% of global trading volume. Lee, in a recent note to clients, wrote that Bitcoin was "increasingly representing the gold investment" for millennials and will ultimately displace the precious metal in portfolios. He contends that Bitcoin could reach $25,000 by 2022, given that it accounts for 5% of the $7.5 trillion alternative currency market, which is growing by 6% annually. By early 2018, he sees it hitting $6,000, a whopping upside of 68%.

Grayscale's Bitcoin Investment Trust (ticker: GBTC), the only exchange-traded product that offers Bitcoin exposure, will capture much of that upside, says Lee. The problem: This is an exchange-traded note, backed by Bitcoin, and it trades at an astonishing 95% premium that has been as high as 125%. That means investors are paying twice as much, plus fees, to own Bitcoin -- a premium that will disappear as the Bitcoin market matures and access becomes less of an issue.

That's already happening. In July, the U.S. Commodity Futures Trading Commission unanimously approved LedgerX's cryptocurrency-trading platform for clearing derivatives; it will start with Bitcoin options. CBOE Holdings and Gemini Trust, the digital currency exchange founded by the Winklevoss twins, announced a partnership to offer Bitcoin futures as early as this year. VanEck has filed to bring products holding Bitcoin "instruments" to market. Exchange-traded fund provider REX is planning two Bitcoin-based derivatives ETFs.

The SEC has rejected Bitcoin exchange-traded funds, citing a lack of regulation of the Bitcoin spot market; a derivatives market in Bitcoin would remedy that. It also doesn't hurt that Dalia Blass, who hails from the law firm that represented the Winklevoss twins' ETF, has been named director of the SEC's Division of Investment Management.